Thank you for standing by. Welcome to the Viva Energy To Acquire OTR Group Conference Call. All participants are in listen only mode. There'll be a presentation followed by a question-and-answer session. If you wish to ask a question via the phones, you'll need to press the star key followed by one on your telephone keypad. I would now like to hand the conference over to Mr. Scott Wyatt, CEO. Please go ahead.
Hello, good morning, everybody. Thank you for joining us today to discuss the very exciting announcement. My name is Scott Wyatt, Chief Executive Officer of Viva Energy. On the call with me today is Carolyn Pedic, Chief Financial Officer, and Jevan Bouzo, our Chief Executive of Convenience and Mobility. Before we begin, I would like to acknowledge the traditional owners of the lands on which we are collectively gathered for this call and pay my respects to their elders past, present, and emerging. Let me begin first on page three of the investor presentation. Today, I'm really pleased to announce that Viva Energy has reached an agreement with Peregrine Corporation to acquire the OTR Group.
As you all know, OTR is the leading convenience retailer in South Australia and, in my view, the best convenience retailer in the country and possibly one of the best in the world. Over many years, they have built a sophisticated and highly successful convenience offer and operating model, which provides the potential to extract considerable earnings from convenience, which are independent and materially greater than the income from fuels. They are genuinely a convenience retailer which happens to sell fuel rather than a fuel retailer which happens to sell convenience. This is exactly the vision that we have for our retail fuel and convenience business. Following the acquisition of Coles Express, this will be a transformative acquisition that will accelerate our progress to becoming the leading convenience retailer in the country. It is strategically important, value accretive to our shareholders, and will generate significant value in long-term growth.
Turning to slide four. Over more than two decades, Peregrine Corporation, owned by the Shahin family, has developed OTR to become the leading convenience retailer in South Australia. The business generates over AUD 3 billion of revenue and employs 6,500 people. By innovating and learning from convenience retailers overseas, OTR has developed a convenience offering that has disrupted the fuels business and diversified the fuel and convenience value chain. Today, OTR has become a life hack for Adelaideans, and it is the clear industry leader in convenience, with more than 2/3 of total earnings coming from convenience sales, and a proven platform to grow through further extension into new markets and offers. On average, OTR generates AUD 3.9 million of convenience sales per store. This is more than double a typical Coles Express, which generally reflects the industry average in this sector.
It really does transform the way we think about the fuel and convenience sector and the potential growth that can be achieved if we get the offer and operating model right. OTR truly epitomizes convenience. Its Always Open network offers a range of successful home brands and key categories with an effective and intuitive product layout in store. It is a leader in food, the number one category in convenience, through regular product innovation and testing at its head office in Adelaide. Modern designs and building formats and fixtures create a welcoming environment, making customers want to stay longer. This will be a critical success factor to attract customers seeking to recharge their electric vehicles in the future. Many stores also contain quick service restaurant operations, which are operated by OTR staff behind the same counter. This brings substantial sales and efficiency benefits.
All of these strategic partnerships, wholesale arrangements, and franchisee arrangements will transfer to Viva Energy on completion. The OTR acquisition is another really important step in our strategy to become a leading convenience and mobility business, which we set out on slide five. If you recall, at our Investor Day in 2021, we detailed our ambition to transform our retail business to a leading convenience and mobility business. The acquisition of the Coles Express convenience business was the first important step in this strategy, taking control of the whole retail business and acquiring the store and retail capability that we need to grow. Today's acquisition is a very critical next step, acquiring proven capability to extend our convenience offer, move into quick service restaurants, and accelerate our growth plans.
Following the completion of this transaction, we intend to extend the OTR offer across the Coles Express network, add new stores, and begin the transformation of our fuel and convenience business. Now, there is a fourth step which aims to extend the OTR offer even further to support electric vehicle recharging and other new convenience offers. Doing so will create even more reasons for customers to visit us so that we make full use of the potential of our highly valuable retail network. Let me now hand over to Jevan to talk about the transaction in more detail and lead our strategic rationale.
Thanks, Scott. Thanks, everyone, for joining. It's a fantastic opportunity to talk to you about this acquisition today. I'll talk to some of the metrics on slide six, I'll move through some of the rest of the pack before handing over to Carolyn. As you know, we will acquire the OTR Group from Peregrine Corporation for total consideration of AUD 1.15 billion, it'll be funded through a mix of debt and capital issued to the sellers. They were keen to see this happen, it's fantastic to see that they will have strong alignment with us in the success of the transition and the extension of the offer to our broader network over time.
On completion, we'll instantly become the leading convenience and mobility retailer in the country, with a clear pathway to grow our convenience business across more than 1,000 stores nationwide. At the outset, it will mean that we grow our convenience earnings from around 30% of gross profit to 50% of gross profit. I'll talk more about this as we move through some of the slides ahead. By extending the OTR operating model to our network, we'll transform our offer through proven brands, IP, advanced technology platforms, and an established back-office capability. Without OTR, we would have had to build these from ground up ourselves with more risk and uncertainty. We'll also create substantial benefits in scale, and I'll talk more about those as we get to the synergy slides.
The acquisition will be EPS accretive on completion. We've set out a couple of metrics here, around 6% relative to our extraordinary results last year, as if we had had Coles Express through that period, and around 26% relative to FY2021. Carolyn will talk more to you about the financial implications shortly. I'll now turn to slide seven, which sets out in a little bit more detail what we're actually acquiring. The OTR Group includes the OTR retail network of more than 200 stores, the GiftBox and Smokemart network of more than 250 stores, and the Mogas and Reliable Petroleum wholesale fuel businesses that are largely based in South Australia. The two wholesale fuels businesses largely supply fuels and lubricants to agricultural customers, and on completion, will be incorporated into the Liberty Rural division of our commercial business.
The GiftBox and Smokemart network sells tobacco and vaping products, as well as gifts and homewares. Like OTR, this network has an advanced technology offering with a modern online platform, with opportunities to extend into a broader product offer. Once we complete, Yasser, who is the current OTR CEO, will stay on to run the existing OTR Group for a period of time and support me in bringing the businesses together. I've known Yasser for some time now. He's the best retailer in the country. I'm really looking forward to what we'll be able to achieve together. Slide eight summarizes the strategic rationale. Each of the following slides goes through this in a little more detail. I'll cover it on a slide-by-slide basis. I'll start by saying there's fantastic cultural alignment across the two organizations.
The way in which Coles has run the express business and developed the operating model and practices and focus on customer service over the past 20 years aligns really well with the mantra and operating focus of the OTR business. Their focus on customer and service and treating their customers like guests when they enter stores gives me a lot of confidence that there'll be strong cultural alignment across the two businesses and will really pave a pathway to transition them together and successfully. Starting on slide nine and the first element of the strategic rationale, like I mentioned earlier, this transaction will provide a pathway to grow our network to more than 1,000 stores over the next three years, backed by a market-leading convenience and mobility offer.
In addition to the 700 Coles Express stores and 200 OTR stores, there's a growth pipeline of another 90, which we'll deliver over the coming years in conjunction with the OTR team. With a large store footprint and a strong growth pipeline, we'll be able to optimize the network, having the best stores in the best locations across the country and with the best convenience offer. More importantly, this acquisition really accelerates the extension of our existing Coles Express offer into broader convenience and mobility markets with considerable potential for long-term growth. As I already highlighted, it increases our proportion of non-fuel income from 30% to 50%.
The reason it moves it so much is because it generates today, the OTR business, more than 70% of gross profit from non-fuel sales, with a gross margin of almost 40% at its fuel and convenience network, well in excess of the Coles Express metrics. It's achieved this by diversifying its convenience offer. In South Australia, OTR has become the destination of choice for not only fuel and convenience, but customer missions like coffee, quick meals, and groceries. It creates the opportunity for us to grow non-fuel sales across a much larger market set, where we currently only have a small position and will create many more reasons for customers to visit our sites. In the bar chart on the right, you can see a range of sectors in which our Coles Express offer doesn't really service today.
When we have the opportunity to roll out the broader OTR offer, including the quick-service restaurants and a much greater focus on food, it will open up a segment of the market, many segments of the market that we don't have access to at the moment. Turning to slide 11, there's a significant opportunity to extend the offer, the technology platforms, and the branding suitable to Coles Express stores over the next five years. With the OTR model, we'll be beginning to run and operate quick-service restaurants across our existing network, and like OTR's current operating model, they'll be fully integrated into the stores and operated by our teams. I can already see a number of opportunities to do that on our Coles Express network today.
Together with the largest company-owned and controlled network in the country, having a high quality convenience and QSR offer will build a defendable position as demand for traditional fuels declines over time. A welcoming store environment and a wide range of products will also encourage customers to spend more time in our stores. For customers needing to fast-charge their EVs, a comfortable store layout will be critical. Not every Coles Express site will be capable of supporting the OTR offer and flagship brand, and so a second store brand will still be required for express format stores in smaller format locations, and we'll continue to work with the team on what this looks like. On slide 12, I wanna cover some of the opportunity we'll capture from this transaction.
When we talk about the uplift in earnings we'll be able to achieve, it's important to remember that we'll be bringing three businesses together, OTR, Coles Express, and Viva Energy's existing retail operations, under one single operation. Taking the most advantaged arrangements from each of the businesses, using procurement scale and consolidating functional support will deliver considerable savings and efficiencies. These should be thought about in the context of the earnings pre-overheads and the considerable size of overheads that sit within the three organizations today. Further, the OTR acquisition avoids the cost of transitional risk of establishing back office infrastructure to replace the transitional service arrangements that we have in place with Coles Group today.
As you may recall, these will run for a couple of years post-completion of the Coles Express business and will take considerable time, costs, and effort to set up replacement functions which we'll no longer need to do as we'll be able to transition directly to the OTR store support center. They have proven capability, rather than build a new ERP system for financial transactions, for example, we can utilize their existing ERP system, which is new, fit for purpose, and scalable for a large network of this nature. There's also significant benefit in securing the fuel supply short that comes with the business. Of course, none of this includes the uplift we will see once we roll out the wider OTR model across our Coles Express network, which no doubt will be substantial in time. On slide 13, I'll talk a little bit to digital and loyalty.
We'll be in a strong position to consolidate a wide range of digital and loyalty offers once we bring the businesses together. This will not only support the best digital experience for our customers, but it will also support improvements in sales through cross-selling convenience and fuel products. Through OTR, we can deliver advanced digital experiences more quickly via their leading technology. This includes digital stores, a payments platform, and customer feedback tools. By purchasing fuel through the OTR digital platform today, customers receive discounts on fuel and convenience products, including the chance to win a free tank of petrol. Of course, the existing Coles Express and Viva Energy network also brings a strong set of partnerships and the Shell Fleet Card offering for commercial customers. I'll now hand over to Carolyn, who will explore the financial impact of the transaction in a little more detail.
Thanks, Jevan. Taking over from Jevan, I'll turn to slide 14, and we'll talk through the key financial implications of the transaction. Just to begin, the acquisition will be funded by a new standalone term debt facility of AUD 600 million and also capacity in our existing facilities, which are largely undrawn at this point. Ultimately, we'll put longer term debt facilities in place. As Jevan has already said, the equity component of the AUD 150 million will be issued to the Shahin family and will be escrowed over a 24-month period. In order to demonstrate the potential of the acquisition, we've shown the pro forma impacts of the OTR Group sales and earnings for each 12-month period to June 30, 2023.
This is based on six months of normalized results to the end of calendar 2022 and a six-month forecast to June this year. On this basis, the OTR Group would add AUD 4.2 billion in sales revenue, comprising AUD 2.4 billion in non-fuel sales. Once readily achievable synergies are realized, that Jevan's touched on already, the OTR Group would add approximately AUD 165 million of EBITDA, of which we expect between AUD 15 million and AUD 20 million will go to the commercial and industrial business. This translates into EPS accretion of 6% relative to our record FY2022 results, which Jevan's already highlighted, and we've pro formed the impact of the Coles Express into the base earnings of that calculation.
EPS accretion of 11% assumes an average historical refining contribution on the grounds that it made an extraordinary contribution during the FY2022 year amid a record high refining margin environment. Finally, EPS accretion of 26% is based off our pro forma FY2021 period, again, including Coles Express as well. Now turning to the balance sheet. In addition to debt and equity, we'll recognize right-of-use assets and lease liabilities currently estimated at approximately AUD 950 million relating to the OTR Group. Following completion of the acquisition, we expect to remain below our target gearing range of 1- 1.5 times net debt to EBITDA, which I'll explore further on the next slide. Lastly, we expect stamp duty and advisor costs to be in the range of AUD 15 million-AUD 20 million.
Our plans for the balance of transaction and integration costs to be absorbed in the previously announced transaction and integration costs with the Coles Express acquisition. This includes removing the Coles Express brand from our existing network. Turning to slide 15. As I mentioned, we expect the OTR Group to contribute $165 million in EBITDA on a post-synergy basis, and we anticipate that this will be achieved over a three-year period. The table on this slide provides the pro forma profile of the OTR Group against our retail fuels and marketing division. Whilst the vast majority of OTR's earnings will be in the convenience and mobility business, a small component will go to commercial and industrial, as mentioned. The group pro forma profile after synergies is shown on the far right column of this table.
OTR's contribution assumes approximately AUD 60 million of synergies, largely from marketing, operational, and supply chain benefits. As Jevan highlighted through his discussion before, we think this is a conservative estimate. In the medium to long term, we expect much further upside from earnings, as Jevan's already mentioned as well, from extending the OTR model out to suitable Coles Express stores, purchasing benefits from our scale as one of the largest convenience and mobility retailers, and also the development pipeline of new OTR stores as of 90 in the pipeline. The OTR acquisition takes our gearing ratio to between 0.6 and 0.8 times net debt to EBITDA, which is below our targeted range. As always, we remain focused on maintaining capacity for further capital management and acquisition opportunities.
Just note our working capital facility is not included in this target range. Moving to slide 16 on our investment requirements over the next few years to begin fulfilling our vision. We expect an additional AUD 10 million-AUD 15 million in annual maintenance CapEx once we take ownership of the OTR stores. Together with Coles Express, this will lift total maintenance CapEx for the convenience and mobility business to approximately AUD 80 million per year. We also expect that the development of the growth pipeline and the extension of the OTR offer to the Coles Express network will, in time, add AUD 50 million of growth CapEx per year. However, this will of course be subject to achieving satisfactory returns. We'll regularly monitor and report on the performance of this rollout. With that, I'll hand back to Scott to conclude the presentation.
Thanks, Carolyn. Look, beginning of this presentation, the acquisition of OTR is a truly transformational step toward our vision to become a convenience retailer that sells fuel rather than a fuel retailer that with a convenience offering. The acquisition of Coles Express gives us full control over our existing retail network and a highly successful express format offering. The further acquisition of OTR will really help us grow convenience sales across a much larger market, deliver earnings growth, and further diversify our earnings base. We are bringing together the best of the Coles Express and OTR businesses to establish a leading convenience retailer in Australia and accelerate our plans to grow in a really attractive convenience market. It's an incredibly exciting time for our business. On that note, let me open for questions.
Thank you. If you wish to ask a question via the phone, you'll need to press the star key followed by the number one on your telephone keypad. Your first question comes from Mark Wiseman with Macquarie. Please go ahead.
G'day, guys. Thanks for the update today, congratulations on the deal. I just had a couple of questions. Firstly, are you able to give an indication of how many of the existing Coles Express sites are going to be suitable for the OTR offer? Is there any rough split you're able to provide?
Yeah, thanks for the question, Mark. Look, that's work that we are still to do. We anticipate there's a large proportion of sites that are ready and will obviously form the first wave of sites that we'll transition across to OTR. Other sites may require redevelopment of stores to provide the right level of floor plate to actually support the broader OTR offer. That'll be a bit later. You know, the other part to this transaction, which is important to draw out, is that we, OTR Group has a pipeline of 90 development sites already secured and at, and during stages of development. Alongside the Coles Express network, we'll see new stores being developed in the OTR format. It'll obviously be a multi-year program.
There'll be some aspects of the network we can get on with quite quickly and a large proportion that gives us confidence about capturing not only the synergies that we touched on, but the broader convenience uplift in our network. You know, we aim to progress that as quickly as we can. Thanks for the question, Mark.
The next question comes from Mark Samter with MST Marquee. Please go ahead.
Yeah, morning, guys. A couple of questions, if I can. The first one, I'll ask this as a negative. I think it's a massive positive probably. I mean, I guess, yes, it's probably embarrassed the whole industry with how much more profitable OTR has been in South Australia than the competition. To ask it as a negative, what do you think are the challenges or the limitations of rolling out what's been such a successful strategy in South Australia?
In other states.
Look, I think we, well, we have a lot of confidence about the opportunity this presents. I say that because, you know, we've, we're acquiring an enormous amount of capability in terms of running the current offer with Coles Express team that comes across. They'll, you know, that's not far away, that transition. The team here in Adelaide, and obviously I'm here today, is an outstanding organization that, as you say, with Yasser's leadership, has built up an amazing business. Anyone that's been here will have seen this in action. I mean, it really is a leading offer in Australia, and as I said, you know, I think in the world.
What we have to get right, obviously, is harnessing that capability across both organizations and extending this in a sensible way across the rest of the network. Having just addressed the team here, with Yasser, I mean, they are so excited about the opportunity to take the OTR brand and offer across the country that I have no doubt that that energy will deliver our success. I can only see up, you know, upside from here, Mark.
Yeah. Just to be so we're crystal clear that the AUD 60 million of synergies does not assume any benefits of the existing sites from what's OTR-
No.
from Queensland.
It's, that's all the synergies you'd expect us to be able to get by bringing together, you know, three retail organizations, capturing the best of all of those in terms of procurement, marketing, operating spend, saving. Obviously, a lot of investment is gonna be required in setting up, a convenience, you know, a back office platform to support the Coles Express business. I mean, there's a lot of operational synergies that will come by bringing the businesses together. Beyond that, as you've just pointed out, there's all the uplift that will come from rolling out this convenience offer and achieving the sales uplift that has clearly been demonstrated here in South Australia over a long period of time. You know, we're going forward not with something that we think is a good idea.
We, something that's absolutely proven that we know can deliver results.
I'm not gonna surprise you with a question about the balance sheet. Now we've got a CFO that's not allergic to debt anymore. Clearly, you'd have to argue this is a much more leverageable business when so much more, you know, post Coles Express, post OTR, so much more of the earnings are coming from the, you know, really pretty defensive, stable free cash flow generative business. We had thoughts about what the right level of gearing should be post-completion of both of the deals?
Yeah.
Sure. Carolyn, would you address that?
Yeah. Sorry, Scott. Yeah, yeah, absolutely.
Okay.
I thought you were just making a statement there for a minute, Mark, and I was agreeing with everything you said.
It was a question. What's the right level? I was joking, Carolyn.
Thanks.
Yeah. No, no. Look, I mean, at this point, we've got our stated gearing ratio, and that's where we're at. Obviously, as we move through time, we'll revisit as we look to sort of refinance and reconsider. At this point we're comfortable with the gearing range with where it's at.
Yeah. Okay. One really quick last question, if I can. Just, I mean, it certainly looks like Peregrine Corporation is keeping all of the sites. Can we just talk about the duration of the leases that have been signed and how that looks?
I could probably give you a bit of context on that, Mark. They're long-term leases, somewhat similar to the terms that you would have seen on the initial re-leases of sort of 15 years and beyond, with multiple option periods. A lot of tenure at the sites, and I'm quite confident that we'll be able to have them for a long time to come. I think I would add too, to some of the comments that Scott made earlier, that there's also a number of sites outside of SA that already operate today. I don't feel that we're taking a lot of risk on taking an SA model and rolling it out nationally. I think we've already got examples where the sites and the offer and the model is working really effectively in other states.
It's really just accelerating that and ramping it up in a sensible way.
Awesome. Brilliant. Thank you, guys. Congrats on the deal.
Thanks, Mark.
The next question comes from Daniel Butcher with CLSA. Please go ahead.
Hi, guys. Thanks. Look, I just wanna follow up a little bit on those questions if I could. Firstly, just let us know how many sites are currently outside SA in the OTR portfolio. I just wanna sort of ask you, like, Would they work in Queensland and WA where you have a bigger land format, land is cheaper, you know, they're pretty huge stores with car washes and massive QSR and so forth. Would they work in New South Wales and Victoria as well? I believe there was a couple of shadow stations OTR was having a look at in Lane Cove and Sydney and elsewhere, if I'm not mistaken, and I'm just sort of curious how they went there trialing their format in the bigger cities where lands are more expensive.
Yeah.
Do you want me to talk to that, Scott?
Yeah. Happy to talk to that. Thanks. Thanks for the question, Dan. I think, yeah, it's really interesting, like, you comment on the larger format stores in WA and Queensland and other locations. OTR already has some sites on the ground in WA. I've been around and looked at a lot of our Coles Express sites already. It's quite interesting that given the historical arrangements with Coles, there's a lot of surplus land at those sites. There's actually a lot of vacant sub-tenancies at the moment that lend themselves to either car, automotive workshops or QSR-type offers that are vacant. They're empty and haven't been filled. Some quite large formats that I think will really lend themselves to the OTR offer immediately.
I'm quite keen to get the offer and some of the QSR operations into those sites quickly, and there's a lot in that category. When you think about some of the sites on the East Coast, Victoria, New South Wales, there's already a number of OTR sites operating in Victoria and some of the other locations. In total, there's probably about 15 or 20 outside of SA running today, and obviously the pipeline to come and some of the ones you mentioned, are right. I think the offer applies equally.
When you look at a lot of our sites in Victoria and New South Wales, just given the fact that Shell acquired most of those land locations between 1905 and 1980, the size of land and location, the size of building the ancillary operations that are there today and in many cases empty or on short-term leases, really do lend themselves to more of a metro format OTR like you see in CBD, in and around CBD Adelaide. I think we'll have a really good opportunity to roll that out more actively in Vic and New South Wales, where we've got the largest concentration of metro sites. And we'll see some fantastic uplift from that over time in addition to the earnings that we've touched on today.
All right, great. Thank you. Can I just follow up on that one maybe, how much benefit do you think OTR gets from recessive trading hours in Adelaide, giving it a little bit of a free kick for after-hours trading versus other states? Does that sort of factor into your thinking at all?
Yeah, all the OTR stores are 24 hours. It's interesting, over a third of our Coles Express network is already 24-hour operations and a lot are 18 hours a day, seven days a week. There isn't really a significant gap between trading hours. I get that supermarkets and other offers tend to close earlier in SA, and they have become known as a bit of a convenience destination. I think that's not due to the trading hours but due to the style of their offer and the way they serve their customers. Ultimately, if they haven't made the locations convenient, then people won't visit them.
I think over time, as we build that brand presence and convenience focus in the rest of the country, people will start to know nationally the OTR name is synonymous with convenience and making life easy, and we'll see that sort of halo effect, I think, on a national scale.
Thanks. If I can sneak one last follow-up in, just on ACCC issues or approvals. I mean, looks like you've got 33 Coles stores in Adelaide from my quick Google. Is that right? Do you see any overlap there that might need to be addressed?
There's 43.
Yeah.
Oh, go, Scott.
No, you go. No, you go, Jevan.
I was just gonna say there's 43 Coles Express operated stores in South Australia and, obviously a smaller number in Metro Adelaide. I expect that there'll be a process with the competition regulator to get approval, and we'll work through that. At this stage, don't expect that to be significant in any way.
All right, great. Thanks for the questions. Thanks.
The next question comes from Tom Allen with UBS. Please go ahead.
Good morning, all, and congratulations on the deal. I might start just by following up the last question from Dan, just on perhaps asking in a different way if you could share some insights on managing those competition concerns with the FIRB, with the ACCC, perhaps considering what you've learned from Ampol's attempted acquisition of the Woolworths Petrol business in 2017.
Yeah, look, I mean, I think we obviously there's a process to go through. There's been other processes in the past. Every process is a little bit different. This is obviously a business that's predominantly South Australian-based. That's where we expect the focus to be. As Jevan pointed out, there's a relatively small network that we have from South Australia that will be part of the focus. We're pretty confident, you know, in the transaction and our ability to progress it. That's all a bit for the, you know, for the future to be, to be frank. We're feeling like we're in a pretty good place to, with the deal and to progress it through that process.
Sure. Sure. Okay, thanks. Thanks. Maybe, just if I can sneak a second one, if you can you've mentioned some of the synergies that are out there that you haven't quantified in the numbers today. There's the earnings uplift per store on OTR compared to Coles Express. How should we think about things like benefits from who buys better inconvenience between Coles Express or OTR?
Yeah, I can touch on that. Thanks for the question. I think it'll be interesting to understand that across the network. No doubt the benefit of the arrangements that we have with Coles Express mean that we've got access to the broader buying power of the Coles Group, we've got some really good alignment with Coles around growing that wholesale relationship with them. I think we'll have opportunity to look at all businesses, obviously Viva from a fuel side, both Coles and OTR from a shop side, bring together the best of all arrangements that each party has.
When you think about the store buying opportunity, I'm sure that Coles have some of the greatest scale and capability in the country, and so being able to leverage that on the buying side, which our arrangements allow for, when we start to bring the quality of the customer offer in OTR together, it means that I'm pretty confident we'll be able to deliver significant value across these businesses, and hopefully well in excess of what we've talked about today.
Okay. Thanks. Thanks, Jevan. Thanks, all. Congratulations again.
The next question comes from Dale Koenders with Barrenjoey. Please go ahead.
Morning, all. Firstly, I was hoping you could provide a little bit of help in understanding the AUD 165 million EBITDA . You've obviously called out the synergies that are in that. How does the remaining AUD 105 million break down between, I guess, the larger buckets of fuel, shops, Smokemart, corporate, and therefore corporate costs, leases, et cetera? Just helping us model it, I guess.
Sure. To give you a little bit of context, on the high level numbers, I mean, what we've talked about, Dale, is that about 70% of the underlying earnings of the business today come from the OTR petrol and convenience offer. We've talked about the number that will move into the commercial business, the AUD 15 million-AUD 20 million of wholesale EBITDA. Obviously, the balance of sort of less than 15% or approximately 10% comes from the GiftBox and Smokemart business. The bulk of our earnings contribution will come from the OTR petrol and convenience business. Save for the fuel supply benefits that we should see, the bulk of the earnings uplift that we'll extract from bringing the three businesses together will be attributed to the petrol and convenience business.
It will effectively sit in retail.
What's sort of the operating cost base that you're inheriting and the depreciation and lease cost?
Maybe I'll just touch on the sort of operating platform across the businesses, and then Carolyn Pedic can give a little bit more context on the other numbers. But when you, when you look at the operating costs platform across OTR, Coles Express and our Viva Energy retail business, it's quite interesting that over the past couple of years, given the growth trajectory that OTR Group has been on, they've invested heavily in their overhead platform. They've got a store support center in Adelaide, which consists of over 550 employees, above store, and so are quite a considerable head office that has been built on the basis of scaling to a national network of the size and scale that we're talking about building and creating today.
I think there's a lot in there already that will help us. There's quite a lot in the Coles Express business, given the reliance on the broader Coles Group and the transitional services arrangements, and there's obviously a level of overhead in our Viva Energy business today. We haven't given actual figures on that, but I can tell you that those are quite substantial costs, and I'm very confident that we'll be able to avoid standing up a lot of corporate and overhead functions to replace the transitional services costs that we have with Coles, by moving a lot of things onto the OTR back office and platform.
Okay. Sorry, were there other numbers there?
Can you just remind me which were the other parts of your question?
I, if you can provide any more clarity on the step-up in operating costs, depreciation and lease costs.
Yeah. I mean, I guess broadly operating costs, we won't provide like a full breakdown of that, but if you just imagine a post synergies, a reasonable level of increase in operating costs, I think you can factor that in.
Yeah. I think to the extent that operating costs go up as a result of running stores under their model.
Mm-hmm.
Their platform, you'll see that in a measured way as we refit stores, and you'll also no doubt see the sales uplift that comes with a broader offer and a broader set of QSR operations. If you're talking store operating costs, I'm pretty comfortable that that will wash its face with earnings uplift over time.
Yeah.
Outside of that, it's probably rationalization of corporate and overhead costs that will come down.
Yes. Agree with that.
Then obviously D&A and other.
I mean, D&A, you sort of see broadly in line with CapEx over time. I guess from a lease cost perspective, you can probably get a bit of a feel from the estimate that we've put in the pro forma balance sheet in the financial statements and the extent of the lives of the leases that Jevan shared earlier.
All that's factored into that.
Yeah.
They're consistent with our earnings style. It's sort of post-lease, like you would normally see the Viva Energy underlying EBITDA.
That's right.
That's perfect. Just trying to help model this. Also on modeling the CapEx, the growth CapEx stepping up to AUD 50 million, I assume that's a rebranding and refurbishment program to effectively run OTR across the network. If so, how many years does it run for, and how long does it take to ramp up to that rate ?
The cost of removing the Coles Express brand in the first instance, so meeting our transitional brand obligations under the Coles Express deal is incorporated in the transition costs of $120 million-$140 million that we previously published and reaffirmed. The $50 million a year is really about rolling out the broader convenience offer. No doubt those two programs will work hand in hand. Where there are some sites that lend themselves to the OTR offer immediately, we'll obviously complete the debranding of Coles Express and a full store refit and implementation of the OTR offer. That'll cross a little bit between the $50 of CapEx on a per annum basis and the transition and rebrand costs.
When you think about the plan to roll out their offer nationally, I think there's a few ways we can fund that. There's obviously opportunities to work with landlords on lease arrangements to fund major refits or refurbs of stores. There's obviously some CapEx which will have the benefit of spending in that AUD 50 million per annum, and we'll monitor that on a case-by-case basis as we start to refit stores and see returns. I think if, you know, returns are materially higher than the base case, then there's obviously a compelling case to continue that rollout and accelerate it and we'll just track that over time.
Okay. Brilliant. Thank you.
Next question is from Naveed Fazal Bawa with Jefferies. Please go ahead.
Hi. Thanks for taking my question. This transaction would increase your exposure to tobacco, including vapes materially. How comfortable are you operating a standalone tobacco business from a social and long-term earnings sustainability perspective? Thanks.
Yeah.
Yeah, look.
Go for it.
Go.
That's good.
I was just gonna kick off and throw to you.
Yeah, okay.
I was just gonna say it's a pretty small proportion of earnings. When you think about the earnings split I touched on before, it's approximately 10% of the underlying business that is derived from that business. There's obviously a broader GiftBox, giftwares, and home homewares business in there as well that contributes to its earnings. From an overall contribution perspective, I don't feel like it's overly material on a company basis. Probably over to you, Scott, to make your other comments.
I mean, I think having taken back the Coles Express business, you know, it's already a segment that we have obviously taken on as well, 'cause tobacco's a reasonably important part of the overall convenience business as it stands today. Acquiring OTR is pretty consistent with that and is part of what we now need to do in terms of running convenience going forward. I think the way I look at it from an ESG point of view or from a social point of view is that, you know, it is a product that has consumer demand. It's an important part of the business.
It's really critical that we manage it in a socially responsible way, and certainly that's how we approach everything that we do in our business and how we will also do it with tobacco. I think, you know, in our hands it's in a good place, and we'll be able to manage it that way and work with regulators on any change that occurs in that industry over time. We feel very comfortable with it.
Thank you.
Your next question comes from Scott Ryall with Rimor Equity Research. Please go ahead.
Hi. Great. Thank you. I was wondering if you could just comment around the terms of Yasser's retention, you know, what's the duration, I guess, is the most important factor to me. Then associated with that, with respect to the rent paid to Peregrine on an ongoing basis. Jevan talked about the duration of the contracts, can you just talk to the structure of them, terms, you know, are they pretty typical of your other lease contracts with the REIT structures that you put in place? You know, no ramp ups that are beyond, you know, inflation or anything else that we would have seen already? Thank you.
Let me talk to Yasser and then I'll hand over to either Carolyn or Jevan to talk about the leases. I think one of the great things about the transaction is that Yasser will stay on for and work with us for the next two years and support Jevan in the transition of the business, but also the extension of the OTR offer into the broader Coles Express business. Yasser has always had a vision about taking the business here in South Australia nationally. He's already started on that journey, as we've touched on, with a growth pipeline to take it nationally.
The acquisition of the Coles Express network has really provided a fantastic opportunity and platform to accelerate that, and that is what has led to this transaction. In many ways, you know, we're, you know, fulfilling a vision that Yasser had for his business, and he's absolutely dead keen to stay involved with us and help us be successful in that journey, because obviously he's got an enormous amount, enormous legacy invested in this and really keen for us to do it well. I think it's a great, you know, in addition to the equity component, this great alignment, I think, you know, you wouldn't want it any other way and it'll be a real asset to our business over the next couple of years.
Thanks, Scott, and I'll just take the leases question. In terms of just adding on to what Jevan talked about earlier, the arrangements we've got in place would reflect market rent. The usual things you would've seen with the rate 3.5% increase, which is standard triple net basis, nothing unusual to call out.
Okay. Great. Thank you. Scott, you mentioned, a couple of times actually during your prepared remarks, once on slide five and then there was one other time about the importance of a good convenience offer for electric vehicle charging. Over the next couple of years, as you implement change to your convenience network, Are we hearing that you're more open to EV charging than perhaps what you have been to date?
I would say we've always been open to EV charging and acknowledging it's gonna be an important ingredient in a convenience offer. I guess what we've never tried to set out to do is try and replace fuel income with the income from electric vehicle recharging. We just don't think that's realistic. That a better way, a better focus is to create a offer at our sites that encourages customers to visit us as regularly as possible. What I mean by that is, like at the moment, if you're a typical, you're driving a typical combustion engine vehicle, you probably visit our stores once every couple of weeks to fill up your car.
If you're going to visit us to recharge your electric vehicle, it may well be that it's a much more regular pattern because obviously the capacity for recharging is less. You need to have fast charging, and you need to have a broader offer that makes it welcoming and enticing for people to spend time there because it's a much. It's a different experience than refueling and having a terrific convenience offer and roomy stores and places to sit, I think is gonna be an important ingredient to make our sites a destination for EV recharging. Beyond that, you know, we wanna create as many reasons for people to visit us as possible, whether it's coming for a daily coffee fix, calling in to pick up lunch on the run, food for the evening, you know, just an occasion.
I mean, that's what convenience is all about. If we can get customers in every day, then we are going to have an income, you know, an income earning opportunity that will certainly be more than resilient to any decline that may happen in the future around fuel. That's where our focus and, you know, EVs will be part of that mix, but it's not like the only thing we're focusing on.
Okay, great. Thank you. Very clear. That's all I have.
Your next question comes from Andrew Hodge with ACC. Please go ahead.
Thanks, guys. I just had a couple questions. One was just on the non-fuel shop sales. Jevan, you said that roughly 10% of the earnings is tobacco. Can you talk about how much that is from revenue? From the ASIC accounts, it looks like roughly about AUD 1 billion is probably of the revenue is not related to actual retail. The second question is just on kind of building on what Daniel had said before about South Australian legislation. Have you guys seen much of a change or has the business seen much of a change since the new legislation passed in October of last year in terms of sales?
Yeah, I can cover those. Thanks, Andrew, for the question. In terms of revenue basis, given the size and scale of Viva Energy, it'll be similarly immaterial from a total group perspective for us. Tobacco earnings are a small contributor at an EBITDA level when you think about that in the context of the GiftBox and Smokemart business. I'm comfortable that it's a relatively small proportion for the total company. When you think about some of the legislation in South Australia, that business has been performing really well over the past six months or so, and seen some really strong sales performance. There hasn't really been any impacts. I'm pretty confident that the offer will work really well nationally.
Is the numbers that he has, that Yasser has done for his stores outside of South Australia comparable to what they've done in South Australia, where they've had a legislative advantage?
Yeah, from an uplift, perspective, when they've acquired stores and, refurbished or refitted them, they've seen the sort of, sales uplift that they've typically enjoyed historically within SA. I'm pretty confident we'll continue to see those.
Okay. Cool. All right. Thanks, guys.
Your next question comes from Tony Waters with QVG. Please go ahead.
Yeah. Hi, good morning. Just wanna circle back on Dale's question earlier. I just don't understand why you can't provide the actual lease costs in the pro forma numbers. I mean, you would've had to disclose it as an EBITDA number if it was pre AASB 16 anyway. just simply, what is the lease cost in that below the EBITDA line?
The overall lease cost in that business is around the sort of AUD 70 million-AUD 80 million mark. I mean, we haven't disclosed it in detail in the release. It's no secret. The EBITDA numbers that we publish, it's important to remember, are not pre-leases. The EBITDA numbers in our release incorporate the lease expense on a pre double AASB 16 basis. Effectively, the old standard where the EBITDA approximates cash. Consistent with the way we report Viva Energy results at a group level, you don't need to deduct lease expenses from that EBITDA number. It's already fully incorporated.
Okay. All right. That's great. Then just adding up the gap in the AUD 4.2 billion pro forma revenue, if you add non-fuel sales and fuel volumes, comes to about AUD 3.4 billion. There's still about an AUD 800 million-AUD 900 million gap there. Can you just describe what that gap is?
Do you wanna just walk me through those numbers one more time?
Well, pro forma revenue is AUD 4.22 billion.
Yeah.
Below, in round numbers, AUD 2.4 billion for non-fuel shop sales and, you know, close to being the fuel volumes, that gets you to about AUD 3.4 billion. There's still a gap there of about AUD 8 billion to the full point.
The gap is just in fuel price. The fuel revenue is the difference. The 985 million liters, it's probably a little unclear there, translates to a much bigger number in terms of revenue, approximately AUD 1.8 billion.
Yep. No, understood. There's a couple quick questions. Can you describe the margin dip in from FY2021 to FY2022? Given you would've had half year of the FY2023 forecast, is there any second half skew in those numbers, or is first half approximately about half that number?
Yeah. first, you can take first half as approximately the second half. That's a reasonable assumption, absolutely.
Yeah. It's pretty balanced in the forecast. I think there's probably potential for upside if you think about growth and sites maturing as they've come into the network over time. We haven't been aggressive in that forecast at all. In terms of the historical dip in performance, that's been pretty consistent across industry, and I think there's a footnote which sets out our performance across that period. There were some impacts as a result of oil price on fuel margins, and COVID lockdowns and other factors that meant that was a pretty soft period across the whole country and the whole industry, and probably not representative of the potential of those businesses going forward.
Of course, the broader weighting to convenience over time will start to soften some of that fuel margin volatility that you're seeing when oil price moves up and down, 'cause we'll have a much greater proportion of earnings from the shop. Another positive in that space too.
Yep. Okay. All right. Great. Thanks.
Thank you. There are no further questions at this time. I'll hand it back to Mr. Wyatt for closing remarks.
Hey, look, thanks everybody for joining us this morning and for your great questions. We at Viva Energy are extremely excited about today's acquisition, as you can imagine, and the opportunities it represents for our business, OTR and the Coles Express teams. We really look forward to sharing more about this development over the coming months. For today, thank you very much for your support and have a great day.